Subsidy Cuts To Threaten Solar Targets

BMI View: The proposed cutting of subsidies for large-scale commercial solar power plants aligns with our core views on the UK solar market and as such, does not come as a surprise. We have long questioned the sustainability of growth in the UK solar industry, as the viability of large projects is questionable. While we believe that community-based solar systems and rooftop installations offer much greater growth potential, reducing support for large-scale projects is likely to threaten the UK's ability to reach its ambitious solar power targets by 2020.

The UK government announced proposals in May 2014 to cut the subsidies offered to solar developers that are building projects with a capacity of 5 megawatts (MW) or above. The proposals, which are expected to take effect from April 2015, mean developers would not receive financial incentives under the renewables obligation scheme. Instead, solar projects exceeding 5MW would have to qualify for support under the new contracts for difference scheme (CfD), but would then have to compete directly with other renewable energy technologies, such as wind power and biomass.

The move has been criticised by industry players and environmental groups, citing that this will effectively curb investment in the UK's solar industry - an industry that has already faced volatility due to an uncertain policy environment. Even so, solar power has up to now registered significant growth, with solar capacity increasing by an estimated annual average of 58% between 2011 and 2013. We expect solar capacity to reach just over 4GW by end-2014, accounting for roughly 15% of the UK's total non-hydro renewables capacity.

UK Renewables Capacity Mix
UK Non-Hydro Renewables Capacity By Type (MW), 2013-2023

The UK government's decision to cut subsidies for large-scale commercial solar power plants aligns with our key views of the UK solar market. In our previous analysis of the market we stated that 'we question the longer-term growth prospects for the UK solar industry and believe that solar power has a fairly limited role to play in the UK's future energy mix (particularly the commercial solar segment), despite signs of robust growth at present' ( see 'Limits to Solar Expansion' November 25 2013).

Three key factors underpinned this viewpoint; historically low capacity factors and intermittency issues, transmission and distribution (T&D) bottlenecks and the need for continued financial support in order to make the technology cost-competitive. These issues are still relevant and reinforce our view that large-scale solar technology is not that viable in the UK - a stance adopted by the UK government. Furthermore, public opposition towards large solar projects remains high and presents a significant barrier to development.

We also noted in our analysis that domestic solar systems offered more potential for growth because they 'are a more reliable and feasible use of the technology, and can be better incorporated into the electricity mix, whilst also helping to reduce power prices over the longer-term for consumers'. Similarly, it seems that this view is also playing out. The government, whilst reducing subsidies for projects over 5MW, will reportedly expand support for community-based solar systems and rooftop installations. In fact, the notion of decentralised power generation is gaining traction in the UK and the wider European market and we believe that this could present an attractive avenue for growth for renewable energy developers ( see 'A New Dawn For Solar: Emerging Opportunities For Investors', May 9 2014; 'Distributed Energy Solutions: Gaining Traction In Mature Markets', May 13 2014).

Although we are not surprised by the announcement, it is likely that this development will threaten the UK's ability to reach its ambitious solar power targets. The Department of Energy and Climate Change (DECC) is aiming to install 10GW to 12GW of capacity by 2020, but with a focus on small-scale community and rooftop initiatives it will be a challenge to meet this target.

This article is tagged to:
Sector: Renewables
Geography: United Kingdom, United Kingdom, United Kingdom, United Kingdom